Friday, 3 February 2012

$70 Oil ? I'd Be Surprised

Shell makes its investment plans "inside a $50-$90 range for oil", the Telegraph reports, and reckons $80-$100 over the next 4 years, with lots of volatility.

The volatility, I buy: and there's no harm in planning on a conservative basis. Otherwise, they must have either a very pessimistic view on the world economy, or lots of optimism on production - which as regards oil means Iraq.

I'm pretty pessimistic on the economy myself, and as noted before the Baltic Dry freight index is collapsing. And it is fair to note that, Arab Spring notwithstanding, the producing nations often work hard to keep the valves open - see this commendable story of how Yemen kept the LNG flowing through a fairly tough 2011 (and aren't the Japanese & Koreans grateful).

But as regards oil,
although there is indeed still plenty that costs less than $70 to produce, the newer big finds (e.g. in Brazil) are more costly. It is Iraq where the vastest, easiest reserves are awaiting development: and they seem to be about to award themselves a civil war. As Iran showed in the early 1980's, a perfectly sound oil industry can go to wrack and ruin when eyes are not on the ball.

I'd say it's the gas price that looks the softer. Recession is very bad for industrial gas demand, as 2009 showed. But LNG production capacity is surging and mothballed LNG carriers are being brought back into service. Huge Australian projects are coming onstream to join the Qatari production which, coupled with US shale, took the post-Fukushima increase in Japanese gas demand in its stride. Of course, ME turmoil might be lethal for Qatar, so complacency would be unwise.

It's a commonplace observation that the dynamics of gas and oil have gone separate ways in recent years.
You don't typically see such big increments of additional production in the oil sector as you do with LNG projects. And we are just reaching the point where the price of oil (Brent, not the meaningless WTI) will have been in 3 figures for a full year.

So - gas soft, oil firm. I reckon it stays that way for a while yet.



Bill Quango MP said...

Chris Huhne charged with swapping points. What do points make?

Mark Wadsworth said...

The long run natural price of oil appears to be about $20, with occasional spikes over $100. So while $20 seems very unlikely from where we are sitting, $70 is even less likely. If it falls that far it might as well go all the way to $20.

The point is, as I explained before, that both supply and demand for oil are very price inelastic, so small changes in either can lead to huge swings in price while quantity produced and consumed is very stable.

CityUnslicker said...

MW..umm..what do you base that on. Oil is running out with no replacement, the long term price is going in one direction.

Personally I think $70 is only going to come if we have a repeat of 2008 again this year. If that happens I am piling into oil over gold.

ND's analysis is spot-on here (pun apols) - whilst gas fins will mitigate oil demand things like kerosene are so inelastic that they will support the price.

I just hope ND is wronjg about that war in Irag or if he is right that GKP sell out first!

Bill Quango MP said...

MW had a post the other day about the price in elasticity of oil over at his place.

Nick Drew said...

yes & as I opined before: volatility definitely ... but $20 ? Nope, that would take a global meltdown on a scale where there'd be no trade in oil or anything else

Budgie said...

BQ said: "Chris Huhne charged with swapping points. What do points make?"

Prize Ass?

Budgie said...

Russia? Iran? Iraq? Saudi? Nigeria? Brazil (Falklands)? That's why we need Nuclear.

rwendland said...

Talking of Japanese gratefulness of LNG supplies, and sliding onto my hobby-horse, Japan are now down to 3 running reactors out of their 54 reactors are still running.

And their new PM, Yoshihiko Noda, says "in the mid- to long-term, dependence on nuclear power must be reduced to the maximum extent, all the while avoiding the creation of a tight electricity supply and demand".

Essentially that kills Japan's new nuclear industry, as end-of-life replacement seems unlikely. I wonder if that pleases Areva/EDF? A competitor is knocked out, but nuclear power credibility takes another hit. Moreover France's second-string reactor design, the smaller backup to the failing EPR, is a Mitsubishi/Areva collaboration, the Atmea, - can it survive Mitsubishi cold feet?

Nick Drew said...

sometimes, being thwarted in its home territory just drives a company to redouble efforts abroad

e.g. Total & shale gas. Or the tobacco industry

rwendland said...

ND: Could be. Toshiba announced a few days ago it is bidding against Areva for another Finnish nuc.

Japan's nuc component industry could well reduce prices with demand down - could have a lot of tooling capital assets written down, so the costing spreadsheets may spit out much lower prices. That might help whole new nuc industry.

But part of the point of an Mitsubishi/Areva collaboration would be that both parties bring home country sales to the party. France may no-longer see much advantage to this collaboration, which is only at design stage. The FT has already been reporting that EDF wants to collaborate with China instead, on a design the Chinese have developed from the French 900 MWe design, the CPR-1000. My guess is that this will be the direction followed, but this older design would need more development to get past EU/US regulators.

rwendland said...

Interesting series of Gazprom stories from Bloomberg, re the current cold-snap. Any views ND?

Gazprom isn’t currently able to meet the additional gas volumes requested by our partners in western Europe (above contracted amounts)

Putin : “If [the people who hampered our construction of Nord Stream] hadn’t interfered, there would already be a second branch and it would be loaded.” (so could supply above contracted amounts)

Putin Says Russian Market is Gazprom’s Top Priority

Gazprom Says Waiting for China to Make ‘Renewed’ Gas Proposal

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